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56 billion rubles - the overall Q1 2020 investment volume
68% of investments – development sites
88% the share of Moscow in total investment volume
Q1 2020
INVESTMENTMARKET kn
ight
fran
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m/r
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I N V E S T M E N T M A R K E T
2
Aleksey NovikovHead of Capital Markets, Knight Frank
The Russian economy underwent two stresses at a time in Q1 2020; the con-sequences of them still remain unclear to the market players. The current condition of the market is utter uncer-tainty. Firstly, the decision of Russia to quit the OPEC deal contributed to the exchange rate volatility due to the collapsed oil prices. Thus, it stood at 61.9 rubles per US dollar at the begin-ning of the year, while the US dollar rate reached 77–79 rubles by the end of March. Despite the new deal arrange-ments negotiated in April, such strong exchange rate fluctuations will continue to affect the actions of the investment market players, many of which have postponed their plans to purchase or sell a real estate property. Secondly, the COVID-19 pan-
Key findings
� As of Q1 2020, the cumulative volume of investments amounted to 56 billion rubles, which is 6% less than a year earlier.
� The land plots for development attracted the largest amount of investment (68%).
� The share of Moscow amounted to 88% of all investments, which is 13 p.p. more than in Q1 2019.
«The effects of the current economic and
social situation in Russia, undoubtedly, will
reach all the property markets, however
any substantial structure changes of the
market are not expected. The property
market turned out to be better prepared for
the crisis, especially after 2014. Moreover,
any crisis is a unique opportunity time
for strong market players, which is often
impossible to grasp in a less volatile market.
We are expecting a drop in the investor
activity, at about 25-30% as compared to
last year. The policy of the Central Bank of
Russia regarding the key rate, as well as the
government policy in terms of spending the
federal budget and the sovereign wealth
fund will play a considerable role in the
stabilization of the investment activity».
Brent crude oil price and US Dollar exchange rate movements
The movements of inflation and the key rate of the Central Bank of Russia
Source: Knight Frank Research, Central Bank of the Russian Federation, 2020
Source: Central Bank of the Russian Federation, 2020
demic has significantly affected the social and economic conditions of this country, its impacts spreading out of the circle of immediately affected business fields to all the sectors of the property market. The officials haven’t made any specific forecasts regarding the development of the economy under the circumstances of such a profound uncertainty. However, it is obvious that we will be going through a slowdown in the economic activity within the next few months, which may result in the GDP ending up in the negative zone in 2020. The current tasks of the Russian government are the slowdown in the coronavirus spread and the miti-gation of the consequences of this spread. In case the situation is brought under control and the enterprises resume func-
20
30
40
50
60
70
80
90
0
20
40
60
80
100
120
140
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
RUR/USDBrent oil price
$/barrel RUR/USD
8.80% 8.78%
6.10% 6.57%
6.47%
11.35%12.91%
5.39%
2.51%4.26%
3.01% 2.50%
8.75%7.75%
8.00% 8.25%
5.50%
17.00%
11.00%10.00%
7.75% 7.75%6.25% 6.00%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q12020
5.50%
11.00%
Inflation Refinancing / key rate
I N V E S T M E N T M A R K E T
3
Total investments into the commercial property of Russia
Quarterly investments
Property investments / capital outflow
Источник: Knight Frank Research, 2020
Source: Knight Frank Research, 2020
Source: Knight Frank Research, 2020
tioning before the half-quarter point of Q2, a speedy recovery of the economic activity is possible. Otherwise, the consequenc-es may be even more considerable and severe than now. The Central Bank of Russia revised the key rate downward by 25 b.p. (to 6,00%) in order to stabi-lize the investment activity this year at the beginning of February. In the April the Central Bank revised the key rate again with further decline by 50 b.p. to 5.5%, the lowest level since 2014. The situation with banking project financing is still positive, the latest Central Bank deci-sions would have a positive impact on it. According to the leading rating agencies, the credit rating of Russia for the end of Q2 2020 remained unchanged. The estimate by S&P Global Ratings (S&P) was BBB- with stable outlook, by Moody’s – Baa3 with stable outlook, and by Fitch – BBB with stable outlook as well.
Over the first three months of the year, the investment into the property of Russia dropped by 6% to 56 billion rubles. In 2019, a growth in the volume of investments was forecast by the end of the current year, however, considering the latest economic and social situation, many investors put off purchasing the properties they had been after. The uncertainty will remain in the market throughout Q2, which will considerably slow down the pace of investment in April through to June. In its turn, as the situation will be gradually getting back to normal, it is likely for the market players to revive quickly. A rapid growth in the volume of investment is most likely to happen in Q3-Q4, including the effects of the backlog of demand.
2016 2017 2018 2019 Q1 2020
285.3 bln rub.52 transactions 249.6 bln rub.
43 transactions 235.3 bln rub.54 transactions
279.2 bln rub.86 transactions
56 bln rub.40 transactions
5.5 bln rub.
5.8bln rub. 4.4
bln rub. 3.2 bln rub. 1,4
bln rub.
Total volume of investment transactions Average transaction volume
2617
4356 59 56
3724
55
19
5751
92
14
38
6154
138 138
123
102
0
20
40
60
80
100
120
140
160
2015 2016 2017 2018 2019 2020
Q1 Q2 Q3 Q4
bln rub.
119,5
161,4
276,9
240,7 252,4
136,1165,6
285,3
249,6235,3
279,2
200
0
20
40
60
80
100
120
140
160
0
40
80
120
160
200
240
280
320
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
bln rub.
Foreign investors Russian investors Capital outflow (bln $)
bln $
I N V E S T M E N T M A R K E T
4
Against the backdrop of the uncertainty in the economy and the real estate market, the popularity of completed properties with the investors decreased, while the land plots for development were the leading market sector, with its share of 68%. The sector remained active mainly due to the easing of the situation with the availability of financing on the part of the banks. The purchase of the land plots in Kolskaya St and Kronshtadskiy Blvd by Capital Group (5.5–6.5 billion rubles) was the largest transaction of the sector. The office property came in second in terms of the volume of attracted investment (18% of all investments). The purchase of the office premises and car spaces in Park
Investments into the commercial property by sector
Source: Knight Frank Research, 2020
The structure of investments into the commercial property by sector Investment volume dynamic by segments (YoY)
Source: Knight Frank Research, 2020
Legend by AlphaStrakhovaniye (5.3– 5.5 billion rubles) was the largest deal in the sector. Retail property came in third in Q1 2020, with its share of 8%. The purchase of Sokolniki Shopping Center by Accent Capital (2.6–2.8 billion rubles) was the largest deal of the sector. It worth mentioning that the warehouse segment turned out to be mostly steady and resistant in current market, while office and retail properties would have greater repercussions caused by crisis events.
As compared to Q1 2019, the structure of demand on the part of the regional investors from all over Russia has changed. Thus, the share of Moscow has increased from 75% to 88%, as of Q1 2020. There were no
significant or major deals recorded for St. Petersburg, while the share of the region in the total investment volume declined from 23% to 7%. As of 2019, the share of St. Petersburg was higher than in 2017–2018 and stood at 26%. Such a performance was due to a major deal signed in the market of St. Petersburg. Thus, a largest purchase of the year happened in the local retail market last year, namely the purchase of Galereya SC. There is no information on any major transaction under consideration in St. Petersburg this year, which means that the share of the region in the total investment volume may remain comparable to that of Q1 by the end of this year, with a small increase.
Industrial and warehouse property х10,6
Office property -57%
Retail property -69%
Hotel property -82%
Источник: Knight Frank Research, 2020
119.5
161.4
276.9
240.7 252.4
136.1
165.6
285.3
249.6235.3
279.2
56.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1 2020
Development site Office property Retail property Industrial and warehouse propertyHotel property Rental housing Other
40%
24%
7%
28%
1% 1%
1%68%
8%
18%Q1 2019 Q1 2020
5%
Development site Office propertyRetail property Industrial and warehouse propertyHotel property Rental housingOther
I N V E S T M E N T M A R K E T
5
The structure of investments into the commercial property of Russia by region
The structure of investments into the commercial property of Russia by investor type
Source: Knight Frank Research, 2020
Source: Knight Frank Research, 2020
As of Q1 2020, the developers were leading the way in terms of the volume of investment, with their share of 72% in the structure of investor profile. They have been active since mid-2019, while their share amounted to 30% at the end of the year, yielding only to the investment companies. Due to the current macroeconomic situation in Russia, the demand on the part of developers is expected to decline in the coming one or two quarters. Considering the fact that the key market players have been making a lot of land purchases during last year and have accumulated a sufficient number of land plots suitable for construction, the investor activity on the part of
developers is likely to decrease this year and in 2021. The share of end user deals increased considerably. Thus, the current figure went up by 11 p.p. to 15% of all investments, while it stood at 4% in Q1 2019. Investment companies were active as well, with their share amounting to 12%. The activity of the banks and the government was minimal, with their cumulative share amounting to 1%.
Russia quit the OPEC oil deal in Q1, which immediately affected the material markets and the exchange rates. The foreign investors postponed making decisions to invest into the Russian Federation, against the backdrop of the growing uncertainty. Their share of investment amounted
to only 4% against 28% in Q1 2019. The foreign investment is expected to be minimal this year. Except for the exchange rate risks, the President of Russia has suggested to lay on another 15% income tax for the foreign citizens or companies, which will significantly cut the yields for the Russian property for this group of investors.
As of Q1 2020, the yields of the traditional commercial property markets amounted to 9.0–10.0% for the premium office properties, 9.5–10.5% for retail properties, and 10.75–11.75% for warehouse properties.
75%
23%
2% 4%
88%
7%
Q1 2019 Q1 2020
Moscow St. Petersburg Regions
91%
5% 4%
0,3% 1%
72%
12%
15%Q1 2019 Q1 2020
Developers End-usersInvestment companies/private investors BanksGovernment
OFFICE PROPERTY MARKET
Alfa-Strakhovanie in Park of Legends business centre – 5.3-5.5 billion rubles.
RETAIL PROPERTY MARKET
Accent Capital in Sokolniki SC – 2.6-2.8 billion rubles.
WAREHOUSE PROPERTY MARKET
NLT and Promstroi WC in Krasnodar – 0.7–0.8 billion rubles.
KEY TRANSACTIONS WITH THE RUSSIAN PROPERTY IN Q1 2020:
I N V E S T M E N T M A R K E T
6
Cap rates for premium commercial properties
10-year bond yields
Source: Knight Frank Research, 2020
The following figures depict the yields dynamics of 10-year government bonds of the UK, France, Germany and Russia in currency terms, as well as the cap rate movements for prime office, retail and warehouse property in rubles (considering the current market conditions).
Source: Knight Frank Research, Investing.com, 2020
Q1 2020
10,25%
8,00%
12,00%
11,50%
9,50%
9,00%9,25% 9,25%
10,00%
10,50%10,00%
9,50%9,75%
9,50% 9,50%
10,00% 9,00%
13,00%
12,00%
10,50%
9,50% 9,50% 9,50%
10,50%10,75%
10,50%
9,75%10,00% 10,00% 10,00%
11,00%
10,00%
14,00%
13,50%
12,50%
12,00%
11,50%11,00%
12,50% 12,50%12,00%
11,50%11,75% 11,50%
11,25%
7%
8%
9%
10%
11%
12%
13%
14%
15%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Capitalization rate for premium office properties
Capitalization rate for premium retail properties
Capitalization rate for premium warehouse properties
Q1 2020
6.47% 6.27%
9.49%
8.00% 7.44%8.50%
6.85%7.71%
14.09%
9.74%
8.38%7.59%
8.73%
6.230% 6.755%
4.79% 4.61%3.02% 4.01%
3.40%
1.98%
1.84%3.03%
1.76% 1.96% 1.24% 1.19% 1.27%0.580% 0.362%
-0.146%-0.187%-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Yield dynamics on 10-year Russian sovereign bonds
Yield dynamics on 10-year UK sovereign bonds
Yield dynamics on 10-year French sovereign bonds
Yield dynamics on 10-year German sovereign bonds
I N V E S T M E N T M A R K E T
7
Macroeconomic indicator performance and investments into the commercial property
Source: Knight Frank Research, Ministry of Economic Development of the Russian Federation 2020
10.3 billion rubles
4.5 billion rubles
2.5 billion rubles
1.5 billion rubles
0.4 billion rubles
9.5–10.5%
10.75–11.75%
INVESTMENT TRANSACTIONS VOLUME
INVESTMENT TRANSACTIONS VOLUME
AVERAGE TRANSACTION SIZE
AVERAGE TRANSACTION SIZE
CAPITALIZATION RATE
CAPITALIZATION RATE
OFFICE PROPERTY
RETAIL PROPERTY
WAREHOUSE PROPERTY
1.1 billion rubles
9.0–10.0%
INVESTMENT TRANSACTIONS VOLUME
AVERAGE TRANSACTION SIZE
CAPITALIZATION RATE
8.2% 8.5%5.2%
-7.8%
4.5%4.3%
3.7%1.8%
0.7%-2.0%
0.3%1.8% 2.5%
1.3%
-9.8%-7.7%
-21.5%-24.1%
-14.6%-10.6%
-12.1%-15.1%
-18.0%
-26.0%
-18.0%
-11.0%
-17.0%-13.0%-11.00%
114.1%116.1%
113.7%
94.9%
106.5%107.1% 106.3%
103.9%102.7%
90.0%
95.4%
101.3%
102.6%101.6%
5
43
59
88
119
104 105
93
85
78 78
95
117
92
108
11
19
0
26
17 19
40
1
23
1814
24
52
29
58
2420
7
120
84
106
36
50
79
109
75 77
40
20
40
60
80
100
120
140
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q12020
Retail
Warehouse
Office
GDP growth
Consumer confidence index (CCI*)
Retail trade turnover
bln rub.
CAPITAL MARKETS DEPARTMENT
SERVICES
� Investment sale and purchase of CRE properties � Investment sale and purchase of CRE portfolio � Investment consulting in all market segments � Equity investments � Mezannine financing � Refunding � Fundraising for transactions
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The member of Russian Capital Markets department work closely with worldwide Capital Markets teams providing full range of services for investors regardless of their location
We are able to offer our clients strategic consulting services locally or worldwide to maximize earnings and minimize the risk
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department consulted first Russian
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the overall Russian Capital Markets department
transaction volume in the last three years
$3 bln
CONTACTS
Victoria Petrova [email protected]
Alexey Novikov [email protected]
Sergey Kuzichev [email protected]
Irina Artemova [email protected]
© Knight Frank LLP 2020 – This overview is published for general information only. Although high standards have been used in the preparation of the information, analysis, view and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects.
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